IPOs: iQiyi, Bilibili Juice Up Fund-Raising Targets

Bottom line: iQiyi and Bilibili should
price near the top of their higher IPO price ranges, as each
benefits from strong investor sentiment fueled by their unique
offerings and a potential new plan to concurrently list their
shares in China.

Anyone who was worried that a
regulatory crackdown on fintechs late last year might dampen
broader enthusiasm for Chinese stocks can relax. That's my key
takeaway from the latest headlines, which show that two non-fintech
Internet firms are experiencing stronger-than-expected demand for
their upcoming listings in New York.

Leading that charge is Baidu-backed
(Nasdaq: BIDU) online video site iQiyi, which has
sharply jacked up the fund-raising target for its proposed New York
listing by a massive 80 percent, in what could well be the biggest
such listing by a Chinese firm this year. At the same time, the
smaller but similarly high-profile Bilibili has
jacked up its own fund-raising target by a hefty 50 percent.

So what's going on here, and why did these companies so poorly
misjudge original demand for their IPOs? My best guess is that
recent headlines saying China is considering a plan to lure its
overseas-listed high-tech champions to make secondary listings at
home could be largely behind the shift in sentiment.

I wrote about that particular news last week. But to recap, the
new plan would allow US-listed Chinese firms to make secondary
listings at home using a new breed of China Depositary Receipts
(CDRs), similar to the popular US American Depositary Receipt (ADR)
program. (English
article) That talk could be getting US investors jazzed that
Chinese companies like Alibaba
(NYSE: BABA) and Baidu, which are now traded in New York, could
soon get significantly higher valuations from bullish Chinese
investors buying CDRs.

We'll return to that shortly, but first let's review the
headlines that come via updated prospectuses filed by both iQiyi
and Bilibili on Friday. The first of those shows that iQiyi now
plans to raise up to $2.7 billion from its IPO, a sharp boost from
its earlier target of up to $1.5 billion. (Chinese
article) The second has Bilibili raising its own target to as
much as $600 million, versus an earlier target of $400 million.
(Chinese
article)

The companies amended their proposals based on new price ranges
for their soon-to-be issued shares, with iQiyi now quoting a top
end of its range at $2.71 per share. Bilibili, famous for its
unusual feature that lets viewers comment on movies and TV shows
with printed on-screen text, has set its upper limit at $12.50 per
share.

Known Risk

These two companies both come from the video space, which is
risky on the one hand due to fickle Chinese censors, but whose
risks are also quite well-known since most such sites have nearly a
decade of operating history. That's quite a contrast from the
fintechs, most of which have three years of operating history or
less and could be subject to more aggressive crackdowns as China's
financial regulator tries to rein in the risks that such groups
pose to the country's financial system.

Both iQiyi and Bilibili also have the distinction of being
somewhat "first-in-class" offerings, with a few caveats. iQiyi will
become the only major video site with a separate listing, among a
group of money-losing companies with big potential as they
challenge older traditional broadcasters. Youku
Tudou previously had that distinction, but was bought out
and privatized from New York by current owner Alibaba a few years
ago. Meantime, Bilibili is also somewhat unique because of the
on-screen comments that are its trademark feature, even though the
company currently makes most of its money from online games.

The strong showing for both IPOs comes amid a concurrent wave of
bullishness for US-listed Chinese tech stocks in general, with IPO
activity getting off to a strong start this year in terms of number
of applicants. One of the few that has actually listed so far this
year, smart watch maker Huami (NYSE: HMI) doesn't
look all that impressive, and is actually trading slightly below
the offering price from its IPO last month.

But I would probably put Huami in the exception column, since
the company makes low-end smart watches and isn't a particular
leader in its field. By comparison, many of the companies coming to
market, like iQiyi and Bilibili, do have more unique functions and
are leaders in their areas. Accordingly, I expect both offerings
will price near the top of their range, and perhaps even get a
slightly lift on their debuts despite valuations that some might
consider a bit lofty.